The carrot or stick approach distinguishes strategies that are perceived to be an incentive, or those that appear to be a punishment. Also, a carrot and a stick are quite different: who wants to eat a stick?
What if you employ a single strategy that could be seen to be a punishment or an incentive? For example, you could offer a discount to clients who settle their bills within an agreed timeframe (an incentive), or you could charge interest to clients who do not settle their bills within your terms of trade (a punishment).
Essentially, the math is the same in both cases, you are using a discount/interest rate to improve your cash flow, but how do clients perceive your actions?
You penalise clients who are late in paying their bills by charging interest until the debt is paid. Clients who do pay on time will see their promptness as a way of avoiding the interest penalty: they are incentivised to pay on time, but the incentive is fear driven, and will be perceived to be a negative, avoiding something bad.
Alternatively, you could offer clients who pay within a certain time frame a discount. Clients will now see this as a positive strategy: if they pay on time they get a reduction in your fee and if they don’t pay on time then they just pay the invoiced amount.
Having decided that the incentive strategy is probably the best strategy from the clients’ point of view, how can a practice achieve a true win-win outcome? At present, it looks as if the client wins – gets their discount – and you lose (the discount taken reduces your profits).
The key is in your pricing structure.
If you charge £1,000 for an accounts job and offer clients a 5% discount for prompt settlement your income is reduced to £950 if the discount is taken.
If you adjusted your pricing policy so you charged £1,053 for the accounts work, then if the 5% discount is taken you will receive £1,000. If you client does not pay on time then he just pays the invoiced fee.
HMRC definitely uses the punishment approach, when are we ever likely to see a reduction in the tax we owe if pay on time?
But you have a choice. If you do offer a discount, or charge interest, how could you change your strategy to achieve a win-win outcome? The world may just be a better place if there were more carrots and less stick…